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Peter Orszag's NYT Column: One Nation, Two Deficits

Objective Voice

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A few snippets from Orztag's op-ed piece are below:

The nation faces a nasty dual deficit problem: a painful jobs deficit in the near term and an unsustainable budget deficit over the medium and long term. This month, the Senate will be debating an issue with significant implications for both — what to do about the Bush-era tax cuts scheduled to expire at the end of the year.

In the face of the dueling deficits, the best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.

Why does this combination make sense? The answer is that over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned.

Despite a dire fiscal outlook, many progressives want to make the tax cuts permanent for all but the very highest earners. Many conservatives are even worse: they’d make the tax cuts permanent for the likes of Warren Buffett, even though he’d prefer they didn’t. Making all the tax cuts permanent would expand the deficit by more than $3 trillion over the next decade.

Let’s look at the facts. The projected deficit for 2015 is 4 percent to 5 percent of G.D.P., depending on whose assumptions you use. A sustainable level is more like 3 percent or lower. So we need deficit reduction of 1 percent to 2 percent of G.D.P., or about $200 billion to $400 billion a year by 2015. These figures are uncertain, but they’re the best we have (and they may well turn out to be too optimistic).

How much savings is plausible on the spending side? Medicare, Medicaid and Social Security will account for almost half of spending by 2015. Even if we reform Social Security, which we should, any plausible plan would phase in benefit changes to avoid harming current beneficiaries — and so would generate little savings over the next five years. The health reform act included substantial savings in Medicare and Medicaid, so there aren’t further big reductions available there in our time frame.

It would be tough, then, to squeeze more than a half percent of G.D.P. from spending by 2015. Additional revenue — in the range of 0.5 to 1.5 percent of the economy — will therefore be necessary to reduce the deficit to sustainable levels.

How would we do this?
Read the rest of the article and let's discuss.

http://www.nytimes.com/2010/09/07/opinion/07orszag.html?_r=1
 

Chappy

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You were Johnny on the spot. But I would claim that this is a political column not an economic one. It basically proposes a compromise, a temporary extension of the Bush tax cuts to stimulate demand while recognizing that America cannot afford these tax cuts in the long term.
 

phattonez

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You want tax cuts to stimulate demand but not on the rich would means less capital investment. You basically want the people to demand more goods without the ability for companies to invest in their production to make those goods. Does anyone else see a problem with this?
 

tacomancer

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You want tax cuts to stimulate demand but not on the rich would means less capital investment. You basically want the people to demand more goods without the ability for companies to invest in their production to make those goods. Does anyone else see a problem with this?
There are numerous examples of economic (and company) growth during times of higher taxation.
 

phattonez

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Given that the economy grew during eras with higher tax rates, it should be assumed that companies are quite capable of growth even with higher taxation.
That's not an argument for why we should do that, especially with an economy that's already down. Don't forget that there was a much higher savings rate in the past as well, which is important for overall growth of an economy.
 

tacomancer

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That's not an argument for why we should do that, especially with an economy that's already down. Don't forget that there was a much higher savings rate in the past as well, which is important for overall growth of an economy.
Why we should do it is another argument, I am stating that it is possible.

My understanding of your post is that you state companies would love the ability to invest if we increase taxes. I could think of no historical example of this happening.
 

drz-400

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That's not an argument for why we should do that, especially with an economy that's already down. Don't forget that there was a much higher savings rate in the past as well, which is important for overall growth of an economy.
In the past we did not have a massive trade deficit. A lot of our "savings" will come from foreign countries. You must also understand the economy is already producing below its potential output because of an aggregate demand shock.
 
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Kushinator

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You want tax cuts to stimulate demand but not on the rich would means less capital investment.
Huh?

You basically want the people to demand more goods without the ability for companies to invest in their production to make those goods. Does anyone else see a problem with this?
I find this comment to be particularly interesting! So lets assume your argument, more demand than productive capacity to meet the demand (never mind that it is bull**** considering the current reality).

What is the end result?

Hint: The detail is in your basic IS/LM model

With this in mind, how can the "lower taxes" lot justify their comments without assuming (incorrectly) increased supply will lead to increased demand (in the short run)?
 

washunut

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In the past we did not have a massive trade deficit. A lot of our "savings" will come from foreign countries. You must also understand the economy is already producing below its potential output because of an aggregate demand shock.
I think most people would say this recession was caused by a credit shock versus the traditional demand shock. That is why this recession is more similar to the 1930's than other recessions.
 

phattonez

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Huh?



I find this comment to be particularly interesting! So lets assume your argument, more demand than productive capacity to meet the demand (never mind that it is bull**** considering the current reality).

What is the end result?

Hint: The detail is in your basic IS/LM model

With this in mind, how can the "lower taxes" lot justify their comments without assuming (incorrectly) increased supply will lead to increased demand (in the short run)?
So when people produce more (and hence earn more), they don't demand more? What a crazy world that would be.
 

phattonez

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You must also understand the economy is already producing below its potential output because of an aggregate demand shock.
Aggregate demand? Or because we have not allowed production to shift to where it is most desirable?

I don't want this to turn into a debate about why looking at aggregates doesn't reveal useful information because that information is far too easy to find.
 

phattonez

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My understanding of your post is that you state companies would love the ability to invest if we increase taxes. I could think of no historical example of this happening.
It's just logic. Less money to invest means less investment, and vice versa.
 

drz-400

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So when people produce more (and hence earn more), they don't demand more? What a crazy world that would be.
It is pretty simple really, at least the basic idea. Other peoples spending is your income.
 

drz-400

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Aggregate demand? Or because we have not allowed production to shift to where it is most desirable?

I don't want this to turn into a debate about why looking at aggregates doesn't reveal useful information because that information is far too easy to find.
Serisously, I am not informed enough to answer such questions. I am not a phd in economics who has developed microfoundations for models of the economy in response to the lucas critique. But I can tell you that it is counter-intutive to think that production just needs to shift to the desirable level of 9% unemployment.
 

phattonez

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It is pretty simple really, at least the basic idea. Other peoples spending is your income.
And your income is what you produce. Produce more, more income. Presumably, you would want what other people spend to represent some actual wealth that they have created (especially in a barter economy model).
 
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phattonez

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Serisously, I am not informed enough to answer such questions. I am not a phd in economics who has developed microfoundations for models of the economy in response to the lucas critique. But I can tell you that it is counter-intutive to think that production just needs to shift to the desirable level of 9% unemployment.
My critique isn't exactly the Lucas Critique, because I don't see raising aggregate demand as ever being the solution to a recession. Simply raising aggregate demand helps only those who are hurting and relatively hurts those who are succeeding when compared to a situation where you didn't raise aggregate demand. Furthermore, this aggregate demand analysis ignores the simple question of why aggregate demand has fallen.
 
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